For Monday, July 2, 2012, we Recommend Against Investing

We recommend selling your equity positions or hedging for a risk-neutral position.

Technical Comment:

The S&P 500 advanced 2.5% on volume higher than Thursday and above the 30-day moving average volume.  The S&P 500 would have to decline about 46 points (-3.4%) on Monday for our forecast to change to an uncertain trend.

Subjective Comment:

In an effort to improve our website we have made a change to the format of our daily posts.  We hope this new format is easy and quick to understand.  We have updated the “how to use” page to explain the new format.  Let us know what you think.

Friday was a very large advance in the market at 2.5% for the S&P 500, and this occurred on strong volume.  The advance appears to be largely due to news from Europe and quarter-end trading, both of which we discuss in the following paragraphs.  This strong-volume up-day is the type of action typical of a strong and growing market, but it is only one day.  The persistent daily data from the S&P 500 has been more consistent with market weakness.  There are clear patterns when an up-trend starts in the market, and we have not seen these patterns develop.  Friday could be the beginning of such a pattern, but by itself the market action on Friday is not a reason to resume investing for market growth.

Friday was also the last day of the quarter.  Managers of large investment funds often buy at the end of a quarter to raise the market so the quarterly reports will look better.  This is called “window dressing”.  The advance during the last half hour of Friday’s trading session was on low volume and indicative of such action as there were several large purchases.  This added about half a percentage point to the advance.  The rest of the advance was the reaction to news the summit of European leaders.  We think the market over-reacted to the news.  The statement from the summit said leaders were near an agreement, and they agreed to keep working out the details.  The market advance on this news is the type of high volatility that has been occurring recently and is likely to keep happening as Europe desperately tries to avoid the unavoidable consequences of their debt crisis.

As we discussed in our prior post, the US money supply growth rate remains at 0% growth and has been at no growth for the past 3 months.  Since this follows almost a year of annualized growth of 7.5%, the mini-bubble-boom that has been occurring in the US economy and stock market has ended.  Only a massive and sudden acceleration of the money supply growth rate can delay the necessary crash that follows every bubble.  US banks and the Federal Reserve appear unwilling to accelerate the growth rate, so a crash will come in the near future.  We have not yet seen a technical pattern predictive of decline, so we advise a defensive investment position for your portfolio.  Accumulate cash and avoid stocks and bonds.  Hold your price inflation hedges for the long term, but do not add to those hedges right now.  Avoid money market funds as they have exposure to European debt.

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